Cover Story - May 19, 2010

Candidates for treasurer on how to handle $2.6 billion

by Dave Boyce

The taxpayers of San Mateo County currently have revenues of about $2.6 billion in an investment portfolio from which funds are periodically withdrawn to pay for the operation of various public agencies, including all county agencies and all local school districts.

Managing this portfolio and serving as banker for these agencies has been Treasurer and Tax Collector Lee Buffington's job for the last 25 years.

Mr. Buffington is retiring at the end of this year and four candidates are vying to take his place: certified public accountant Joe Galligan, deputy county treasurer Sandie Arnott, investment adviser Richard Guilbault, and entrepreneur and community college district trustee Dave Mandelkern. (The candidates are listed here and discussed in this story in an order established by

If no candidate gets more than 50 percent of the vote, the top two voters-getters will be on the ballot in November for a runoff election. The winner will take office in January.

The Almanac e-mailed questions to the candidates and their answers are the basis for this story.

Lessons from losses?

For the first quarter of this year, the county's portfolio earned $1.5 million, according to a Treasurer's Office report. Not bad, particularly when compared to September 2008, when $155 million went up in smoke as Lehman Brothers investment bank went bankrupt.

Some school districts lost millions. The Sequoia Union High School District, which includes Menlo-Atherton and Woodside high schools, took a $6.5 million hit, about 7 percent of its annual budget. The Menlo Park City School District lost $3.5 million, or 14 percent.

Of the counties in California that lost money in the Lehman collapse, the average loss was $5 million — one twentieth of what San Mateo County lost, according to figures provided by the office of Congresswoman Anna Eshoo, D-Menlo Park. Are there lessons here?

"Diversification is the lesson learned, which is really a lesson that should have been followed since that is basic investment strategy," Mr. Galligan said.

Mr. Galligan said that California counties other than San Mateo with Lehman deposits lost an average of $15.5 million. When asked for his source, he said the Wall Street Journal. When asked to comment on Ms. Eshoo's numbers, he replied: "Whether the average loss was $5 million or $15 million, those portfolios were diversified which is why their losses were so far below San Mateo County."

The Treasurer's Office has "tightened" its investment policy, Ms. Arnott, the deputy county treasurer, said. "We have a low exposure to commercial paper. As the financial market has changed we are reacting accordingly through extremely conservative investing."

"Lehman occurred as a result of fraud, deception and greed on the part of Lehman, the rating agencies and the accountants," she added.

The new treasurer should have Wall Street experience, Mr. Guilbault said. "Not one of my opponents has 27 years of fiduciary investment and management experience," he added. With fragile economies in Greece, Portugal, Italy, Ireland and Spain, the ramifications of sovereign-debt default "will reverberate throughout the full spectrum of fixed-income investments. We must be vigilant and prepared, not reactionary after the fact."

The treasurer should take the exposure limit for commercial paper and apply it throughout the portfolio, Mr. Mandelkern said. "We also need clearer guidelines on how to deal with downgrades to investment ratings on securities," he said. "The lack of action when the Lehman Brothers securities were being downgraded (and other municipal investors were bailing out and avoiding catastrophic losses) was tragic and must never happen again."

Opt out for schools?

When Lehman collapsed, the cities and towns in the county that had deposits in the state's Local Agency Investment Fund (LAIF) did not lose anything. Should school districts have options to make deposits in the state fund or with other fund managers? Except for money declared by a school district to be surplus or special reserve, they must deposit their operating and capital funds with the county treasurer.

"School financing is a very complicated process and is difficult to understand, even by the most qualified school trustees," Mr. Galligan said. Property tax revenues are distributed semi-annually and schools have year-round payrolls, so schools sometimes must borrow, and it is convenient that the treasurer have the funds at hand, he said.

The investments should be "transparent and listed on the county website and updated on a monthly basis," Mr. Galligan said.

Districts can already authorize independent investment of special reserves or other surplus funds not immediately needed, Ms. Arnott said. The treasurer "has a fiduciary responsibility to protect the county's funds," she added. Giving the treasurer the authority to independently invest a district's surplus funds "would put that responsibility at risk," she said.

"I understand the frustration felt by the schools and special districts in our county," Mr. Guilbault said. What's needed, he said, is transparency and better communication. "It is very important to work closely with our school boards and key stakeholders in the county, state and federal government to develop best practices, competitive analysis data, benchmarking and be knowledgeable about cutting edge technology to improve processes."

School districts, Mr. Mandelkern said, have options with surplus funds, but it's "dangerous and risky" to make decisions ordinarily handled by state and county professionals.

The county pool "is not the only game in town" for districts, he said, adding that he would increase the frequency and detail of fund updates, including at the website, and work toward what districts have asked for: options that balance safety and yield.

Outside advice?

San Mateo County's pool investment policy requires that 80 percent of the $2.6 billion fund be invested in government-backed securities, according to a policy document at the Treasurer's website.

The policy states that the remaining 20 percent — $520 million, in this case — should be invested in corporate bonds. There are many corporations to choose from, some more reliable bets than others. Who should make such decisions? If it's not the treasurer, how should the treasurer go about finding an independent adviser?

"That takes an expertise that I will contract out for, meaning that I will hire a firm to help manage the corporate bond portfolio," Mr. Galligan said. "They already perform the due diligence needed and it will be easy to find a good company. We just need to find the investment companies that were not invested in Lehman Brothers two years ago."

Ms. Arnott noted that a resource is already available: the advisers that assist other county treasurers. She would issue a request for proposal (RFP) and make a choice based on past performance, references, conformance with the RFP requirements, availability, fees charged, and an "on-site due diligence inspection."

The adviser that was consulting with San Mateo County during the Lehman collapse was not a "true professional," Mr. Guilbault said. "It is important for the treasurer to have access to the expertise and information provided by the various investment vendors and hired consultants. It is however critical that the treasurer has the background, education and, most of all, the experience to properly evaluate what is being presented."

A report to the county Board of Supervisors after the Lehman collapse, Mr. Mandelkern said, noted that $2 billion is too large a sum for an individual to handle, that the county would benefit by the "redundancy and bench strength" of outside portfolio managers, and that, if the fund were pooled with an even larger fund, it could lower market transaction costs and give the county access to otherwise unaffordable fund-management software.

Joe Galligan

Profession: Certified public accountant and head of CPA firm for 30 years; former Burlingame mayor and City Council member.

Education: College of San Mateo; College of Santa Fe, summa cum laude bachelor's degree in accountancy; Golden Gate University, master's degree in taxation.

Age: 54

Sandie Arnott

Profession: Deputy treasurer-tax collector for San Mateo County; started with county as executive assistant in 1989; lease officer for regional bank; corporate purchasing agent.

Education: College of San Mateo (no degree); 18 certificates related to continuing education courses in finance.

Age: 57

Richard Guilbault

Profession: Corporate statistician, securities sales, founder and head of investment management corporation.

Education: San Jose State University, bachelor's degree in business management; University of Southern California, master's degree in systems management.

Age: 59

Dave Mandelkern

Profession: Retired entrepreneur in health care and online-learning industries; board member of San Mateo County Community College District.

Education: Stanford University, bachelor's degree (with distinction) and master's degree, both degrees in electrical engineering.

Age: 50


Posted by Watch Dog, a resident of another community
on May 29, 2010 at 3:22 pm

Thank you for the great article on the candidates for San Mateo County Treasurer.
The answers given by the candidates and the education listed, clearly show that Joe Galligan is by far the most qualified candidate. If this were a recruitment instead of an election, Joe Galligan would be hired.
As I stated in a previous post, I do not understand why the Almanac endorsed Dave Mandelkern over Joe Galligan. Dave Mandelkern definitely comes in second but not a close second.
Both Mandelkern and Galligan are right about one thing and that is the time has come to clean house in the Treasurer's Office.

Posted by Concerned Voter, a resident of Menlo Park: Allied Arts/Stanford Park
on May 29, 2010 at 3:23 pm

Clearly, Joe Galligan's education, experience and public service make him the most qualified candidate. Mr. Mandelkern is accomplished and well educated, however not in the finance field as is Mr. Galligan. Mr. Guilbault has been an investment advisor for many years and may have "Wall Street" experience, but the County cannot invest in Wall Street stocks or derivatives, only government securities and highly rated corporate paper. Ms. Arnott has held clerical and middle management appointments in the Treasurer's Office for 20 years, but has never been in charge of investments according to a letter from Lee Buffington on her web site. Her lack of higher education is also of concern.

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